Nasdaq painting a worrisome picture

December 14, 20214 Comments

The NASDAQ has been the leading index of the bull market that began shortly after the 2008 stock market crash. Reliance on technology along with low interest rates (aiding investment by tech growth companies like the FAANGs)  has grown exponentially over the past decade +.  That perfect setup of low rates and a consumer evolution into online everything has rewarded high growth tech stocks. But, as has always happened on the stock market, a parabolic rise by one index, one sector or one group of stocks will inevitably end with a statistical reality. That statistical reality is known as “regression to the mean”. To put the term simply, an asset class that has deviated too far (up or down) from its mean return will eventually regress back to that mean return (aka trend). I believe that a negative regression to the mean trendline is inevitable for the NAZ.

The big picture

Here’s a chart illustrating the long termed trendline for the NAZ since the bull trend began in late 2009. I’ve printed a very long termed ROC (Rate of Change) indicator illustrating a 52 week lookback to get a picture of it’s big-picture momentum. I’ve also printed a standard lookback (default) for MACD below the chart.

Three things I want to point out on this chart:

  1. The chart clearly illustrates a parabolic move (35%) off of its long termed trendline.
  2. The ROC hit an all time momentum thrust high this summer, and has plummeted since then – despite a bullish trend (highs & lows)
  3. MACD has also reached an all time momentum high along with a very serious divergence against the rising trend of the NAZ.

 

 

Near termed view

The chart below is a daily chart illustrating  the CMF moneyflow momentum indicator (top pane), and stochastics/ RSI (bottom panes). I’ve also added Bollinger Bands to the chart. My observations:

  1. BB’s show a price that is running along the bottom, and widening volatility. This tells us that price is a bit oversold, but the bands are wide – so price could continue being negative in the near-term.
  2. CMF, stochastics and RSI are all showing a downtrend (red arrows), but I’ve noted a bit of neartermed strength as they appear to be in the early stages of hooking up from mildly oversold levels (green arrows and circled levels). Its early to say if that continues, but it may suggest that the “big” correction is not here today.

 

Conclusion

The NAZ is long-termed overbought, all within a long termed bullish uptrend. Many signs suggest a correction to the trendline is inevitable. One way the NAZ can join its trendline is to trade sideways for an extended period. That’s a very real possibility.

Or…the NAZ might decline to its trendline. In this case…You would need to extrapolate the angle of the trendline forward and make an assumption of the angle of decline by price to make an assumption of “how low it will go”. A reasonable target might lie somewhere between current pricing (15,000+) and the trendline (10,000). Split the difference, and the target lies somewhere near 12,500- 13,000. That’s close enough to a 15% potential downside for the NAZ – should it correct rather than consolidate.

Meanwhile, the neartermed view appears precarious. Small signs of downside pressure abating might be noted in the move up from oversold levels and the running along the lower BB levels. But, its to be seen if the NAZ can catch a bid. Thackray’s guide suggests that the NAZ can outperform the SPX from December 15th on – this is a seasonal tendency. So…its got that tendency in its corner for a neartermed upswing.

All in, I’d play the oversold rebounds and seasonal cycles if any, but I don’t want to hold the NAZ for too long. This – lest I get caught in the inevitable regression to its long termed trendline.

4 Comments

  • For you market timers, what’s happening right now is important of course. But in the last 20 years, QQQ has risen 928.2%, buy and hold according to Stockcharts. over five years, it rose 232.5%. A pretty good Rip Van Winkle stock wouldn’t you think? It would be interesting to see what QQQ would have done with your system over the years. No doubt it would have been more.

    Reply
    • Yes buy and hold is great if you can take the big swings–and it makes money. The strategy of buying and selling the big trend breaks on a weekly chart as I outline in my upcoming course (up or down) will outperform except markets for the odd head-fake. More importantly, it drastically dampens volatility even when matching market returns. Particularly when you rotate beta and sectors (again covered in my course).

      Reply
  • Since Facebook started to use the word metaverse, this word has been popping out in the media, even Jim Cramer has had an article this morning about it. I have trying to understand what metaverse mean, but I cannot get me head around the word and it’s implication in the stock or stock trading, I hope you can shed some ligth into this

    Reply
    • Didn’t Shakespeare say that a rose by any other name is still a rose (paraphrase)?

      Reply

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